FTX made its bankruptcy official during the current week, but this problem, which in itself is a transcendental one, would only be the tip of the iceberg. According to information gathered by Reuters, Sam Bankman-Fried, co-founder and now ex-CEO of the platform, had implemented a backdoor to divert customer funds. In this way, he would manage to go unnoticed.
In the case of FTX, as described by the aforementioned media, the backdoor was present in the accounting software. The vulnerability would have allowed Sam Bankman-Fried to execute commands to alter accounting records without anyone noticing.
The aim was to hide his movements not only from the eyes of other areas of the company, but also from external auditors.
The backdoor was allegedly discovered during an investigation conducted by FTX’s legal and financial teams. Their analysis exposed that Bankman-Fried managed to secretly transfer $10 billion to Alameda Research, FTX’s sister company and also run by the same character.
Evidently, the security software did not raise any alert about the move. The accounting software, for its part, did not register the event either.
And that’s not all, of the aforementioned amount about $1.7 billion is completely missing.
Sam Bankman-Fried denies the accusation but the FTC is on his trail
In response to the Reuters report, Bankman-Fried denied having made a $10 billion transfer of client funds to Alameda Research. “We did not secretly transfer. We had confusing internal labeling and misread it.”
Also, he denied having implemented a backdoor in FTX’s accounting software. That said, regarding the stratospheric amount that went missing, he declined to delve into the subject.
Bankman-Fried’s statement was not enough to convince the authorities. Months before FTX made its bankruptcy official, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) had already launched an investigation against the platform for the possible misuse of its clients’ funds.
The scandal that emerged during the current week caused both agencies to step on the gas in their inquiry.
It appears that Bankman-Fried is about to face a very complex situation. The SEC somehow may have known about the squandering of the funds, and FTX’s internal teams allegedly found a back door to transfer the funds. At the moment, the aforementioned has no way to defend itself.
Binance steps aside to avoid trouble
It was this investigation that caused Binance to decide not to go ahead with the proposed purchase of FTX. The former platform had intended to absorb the Bankman-Fried-led company to pay off its debts.
Recall that FTX ran out of liquidity after a good portion of its customers requested to withdraw their funds. A report had disclosed that Alameda Research’s balance sheet was mostly made up of FTT (FTX’s token) and other cryptocurrencies.
Being FTX’s sister company, FTX users also had doubts about the true solvency of the platform and preferred to jump ship. They later realized that, indeed, there was not even liquidity to receive their money.
“As a result of corporate due diligence, and recent reports regarding the mishandling of customer funds and alleged investigations by U.S. agencies, we have decided to suspend the potential acquisition of FTX,” Binance said.
For their part, the FTC and SEC will continue their investigation and if the agencies find irregularities in the handling of funds, including the implementation of the backdoor, it will be difficult for Bankman-Fried to avoid exemplary punishment.
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